1. (SBU) Summary: During a lunch meeting with U/S Jeffrey,
local representatives of Chevron, ExxonMobil, and
ConocoPhillips told us that the best way to engage Russia and
enhance global energy security is to focus on positive
dialogue geared towards helping Russia improve its oil and
gas investment climate. They said Russia is about to embark
on a new era of oil and gas development in areas (East
Siberia and Arctic regions) that cannot be exploited without
Western technologies and expertise. They lamented Russia's
political posturing, lack of business instincts, corruption,
and underdeveloped human capital, but suggested that these
problems should not stand in the way of increased
cooperation. End summary.

2. (SBU) Representatives from the three major American oil
companies in Russia told U/S Jeffrey that a "very sensitive"
Russia is seeking recognition of its new status and power in
the world. Russia feels it is being talked to, not listened
to. They agreed that in some sectors, the value of open
markets and competition has been recognized and has resulted
in spectacular development. In others, such as energy,
unfortunately, Russia's policy is centered on control. They
said Russians suffer from "short-termism" and an aversion to
risk that hinders the long-term, risk-management strategy
needed to develop the oil and gas sector.

3. (SBU) One company head said that having taken over the oil
and gas sector and seeking a model other than the American
one, the Russians now don't know what to do. The tax
structure is overly burdensome, preventing needed investments
in new fields. However, this situation will likely reverse
itself as oil production stagnates and/or falls. According
to the representatives, we can help Russia develop a better
investment climate and redirect its tremendous talent pool,
but we need to do so without sounding especially preachy.

----------------------------------
NEW ERA OF OIL AND GAS DEVELOPMENT
----------------------------------

4. (SBU) Having exploited the "easy" oil from Western
Siberia, Russia now must explore and develop much more
complex fields in Eastern Siberia and the Arctic -- an
endeavor which, according to these experts and others, Russia
cannot successfully undertake without Western technologies
and expertise.

5. (SBU) All three representatives described the
inefficiencies they encounter in Russia. These are due to a
lack of risk-management expertise as well as a managerial
class educated and trained in Soviet times, completely
sheltered from international business practices and
capitalism. For example, a Russian refinery is 3-4 times the
size of a U.S. one, due to concerns that result in unneeded
spacing between complexes because the Russians expect part of
the refinery to explode sooner or later. Another example
given was Lukoil's West Qurma project in which Lukoil plans
to drill 500 wells with the same expected result as an
American company could obtain with 70. One representative
said a local partner's measure of results included "meters of
well drilled" -- a seemingly Soviet objective unrelated to
results, but often still codified in licenses issued.

6. (SBU) One company representative bluntly said that most of
his Russian workers over the age forty, unless they have
spent significant time abroad or previously worked for an
international company, are of little value. Their mindset
and work practices, resulting from training and education in

MOSCOW 00003529 002 OF 002

the Soviet period, are nearly impossible to change. One
company has two adjacent projects with two different local
partners. In one, 15 years of cooperation have yielded some
of the best results the company enjoys globally. In the
newer venture, due to the workforce having been unexposed to
international best practices, the results are among the
company's worst globally.

---------------------------------
THE USG TONE NEEDS TO BE POSITIVE
---------------------------------

7. (SBU) Acknowledging all of Russia's shortcomings, from
political posturing to corruption, the executives were
unanimous and clear in their interest that the USG approach
Russia in a positive manner. Asserting that threats and
lectures only backfire, they suggested the USG try to help
Russia improve its investment climate by seizing on the
potential of Russia and avoiding unnecessary confrontation.

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